Do stock prices influence corporate tax behavior?

Abstract

This study examines how the firm-specific information in stock prices influences corporate tax behavior. Research demonstrates that managers learn from and respond to information contained in stock prices. However, the extent to which this information affects tax-related decisions remains unclear. I find that price informativeness increases the volatility of effective tax rates. Additional analyses demonstrate that the effect is driven by price informativeness encouraging managers to pursue additional short-term tax planning opportunities. Further, in settings where stock prices are more likely to contain tax-related information, my results are more pronounced as the proportion of taxrelated information in stock prices increases. The results of this study demonstrate that managers learn from the market when making tax planning decisions.